What Is The Total Investment Cost?

By Paul Giggi

Question 1 of 5 in the Blog Series: Top 5 Questions To Ask a Franchisor

If you haven’t had a chance to see our Video on this topic I would like to suggest you do so. For this blog we will focus on Question #1 of our Key 5 questions to ask the Franchisor.

At your first introduction to a Franchisor, there are many questions to consider asking. Some are more important than others in the initial phase as you try to determine if a particular concept and Franchisor is the right one for you to partner with in operating the business.

The first of our 5 Key Questions to Ask:

What is the Total Investment Cost?

You’ll probably come to the table knowing your total available investment capabilities. But to ascertain if you can afford the cost and risk of the venture, you need to understand the Total Investment Cost of the Franchise. Asking the question about Total Investment Cost has many parts to it, so be sure to ask for specifics and fully understand the reply.

Franchisors are governed by the Federal Trade Commission and, therefore are restricted in the detail of the information they can share as they are not allowed to make an earnings claim to prospective Franchisees.  This is to protect them (and you) as you move forward in your due diligence. Without this protection the Franchisor could fall prey to lawsuit liability; if they tell a prospect what they will see as a return and that return is later not realized. It protects you from unscrupulous Franchisors that otherwise might offer false financial promises and information so to entice you to become a Franchisee.

Franchisors are normally going to share with you a range of costs for the complete operations build-out and opening of a single unit. Within this range are numerous items to be sure to understand and discuss. Many of these costs are disclosed in the Franchise Disclosure Document that you will receive as your next step in the qualification and discovery process.

The range offered could be small or large depending on what type of construction (i.e. free standing, end cap, in line, etc.…), the purchase approach (build to suit, your own build, lease, etc.…),  and other important components. When this range is offered to you, if some of these items are not offered immediately, be sure to ask what category the range covers and then discuss the inclusions and exclusions of this range so you have a firm understanding of what additional costs you may have to incur.

Typically, the range will cover your construction costs, FF&E (Furniture, Fixtures and Equipment), permit costs, opening inventory, signage, POS (Point of Sale) systems, opening training costs, opening marketing costs and may even include a certain amount of working capital. There will be more items included and be sure to ask what items are in the range. Also, and as important, be sure to understand what is not in the range.  Often items such as your Real Estate costs and liquor licensing (if applicable) will not be included. Once you have the “all in” figure you are prepared to review the Franchise Disclosure Document (FDD) with a better understanding of the cost areas to target and get a clear understanding.

This question is an important one to fully understand and you may want to consult with those who are current franchisees of a concept or with people who have experience in this area so to be sure you leave no stone unturned in your informational search.

Please check out our Video and watch for future blogs on the other important questions to ask of your Franchisor.

How Many Bids?

I often get asked for contractor recommendations. I usually provide a short list of contractors that I’ve worked with in the past with success, or whose thorough work quality I’ve witnessed firsthand. When I hand over the list, the next question usually is: ‘Should I contact all of these?’

The answer is more complicated than a yes or no. Some contractors on the list only do work in certain states, some specialize in certain states. Some are headquartered far away from the project site, and would charge for travel to and fro. Some work with unions, some do not. These facts will usually filter down the list to three or four contenders that you can call and talk to about your project.  After that initial contact you should have a feel for the various companies, their ethos, timelines, and whether or not they’d be a good fit for your project.

Generally, my recommendation is to get bids from 3 contractors. Getting 3 bids allows you to make an informed decision on project costs and timelines. Plans get distributed to the contractors at the same time they are initially submitted to the city or county – the plans submitted to the contractors are called a bid set. A good and thorough contractor will take about three weeks to turn a bid around to you. By this time you are close to getting your first round of comments back from the building department (and/or health department if you’re permitting a food use). Barring any substantial comments by the departments, you should have a pretty good idea of the project costs.

I see many franchisees that go with the cheapest bid. But, be sure you are comparing apples to apples. Below are some other items in the bid to consider:

  • Timelines – if a project schedule isn’t provided in the bid, ask for one. Can one of the contractors get you to your opening date a few weeks earlier that the others? Quantify your projected weekly revenue and determine if there’s a decent return.
  • Weekend work – some construction companies work weekends or have provisions for weekend work in the event of weather delays or other unforeseen delays.
  • Dedicated workers on the project – will your project have a designated onsite super? Make sure there is someone to hold accountable if your timeline extends past the projected completion date.
  • Itemized vs lump sum bids – Some contractors will categorize items as ‘lump sum’ while others will categorize that same item as an ‘each’, ‘cubic foot’ or for whatever the situation calls. If you see ‘lump sum’ on one bid and ‘each’ on another, ask questions. There could be some hidden or padded costs in the lump sum designation.
  • Equipment Install – Many times a contractor’s bid will include installation of food service equipment. Be aware that your food service company will likely have a line item in their bid for this service as well. Don’t pay for it twice!